Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
October 7, 1993
Calgary District Office Resource Industries
J. Walker Section A/Chief of Audit
Peter Lee
(613) 957-8977
Attention: John Kurrant
7-932865
Successor Rules and Partnerships
Further to recent telephone enquiries from the Calgary District Office, this is to clarify the Department's position stated in the 1991 Canadian Tax Foundation Conference (roundtable question #2) with respect to the subject matter.
The roundtable question and the Department's response are as follows:
Q.2 Production Income for Purposes of Section 66.7
Paragraph 1 of Interpretation Bulletin IT-138R states that income flowing through a partnership retains its character. Does a partner's share of production income from a partnership also retain its character as production income for the purposes of the successor rules in section 66.7 of the Income Tax Act?
Department's Position
Yes. This would be so according to paragraph 96(1)(f) and (g) of the Act.
According to the background material to this roundtable question, it was not intended that this position would override the provisions of paragraph 66.7(10)(j) of the Act. This position only applies to a situation wherein a successor corporation has acquired resource properties under circumstances such that the section 66.7 successor rules (the "Successor Rules") apply and these resource properties are subsequently transferred to a partnership of which the successor corporation is a partner. Unfortunately, in the final version of the question, the details of this explanation were inadvertently omitted.
If we applied the above-noted position to a situation wherein immediately before a change in control of a corporation, it had an interest in a partnership in which the underlying assets were resource properties, subparagraph 66.7(10)(j)(ii) of the Act would be redundant.
We note that in the event of any increase of a successor corporation's percentage interest in a partnership subsequent to an acquisition of control of the successor corporation, subparagraph 66.7(10)(j)(ii) of the Act is necessary in order to limit the share of the successor corporation's income attributable to the partnership's resource properties to the corporation's percentage interest in the partnership at the time of the acquisition of control.
It is the Department's position that an interest in a partnership, the underlying property of which consists of Canadian resource property, is not a Canadian resource property. (See the Department's responses to questions 54 and 4 at the roundtable sessions of the 1986 Canadian Tax Foundation Conference and the 1990 Canadian Petroleum Tax Society Conference, respectively.) Under common law, it is arguable that the partners of a partnership collectively own the partnership property (see the case of Seven Mile Dam Contractors v. The Queen in Right of British Columbia, (1981) 116 D.L.R. (3d) 398 (BC-CA)), but, pursuant to subsection 96(1) of the Act, income and loss of a taxpayer who is a member of a partnership must be computed as if the partnership were a separate person and the owner of the partnership property (by analogy, see the case of Norco Development Ltd., 85 DTC 5213 (FCTD)).
Accordingly, without the application of subparagraph 66.7(10)(j)(i) of the Act, subsection 96(1) of the Act precludes the application of the Successor Rules in respect of the partnership's resource property where there is a change in control of a corporation which owns an interest in the partnership, because it cannot be said that the corporation owned the partnership's resource property for the purposes of the Successor Rules.
Please direct any questions, internal or external, regarding the above matters to the writer or to John Chan at (613) 957-8976.for Director
Manufacturing Industries, Partnerships
and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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